Commodities have been a good gauge of the strength of economic recovery. Hence are we saying the global economy is headed for a tailspin? A minor correction is understandable but the way they have been correcting implies there is something graver in the works.
Price of oil has fallen into a hole, so much so that it is below some of the OPEC members' production cost even. Other commodities have done likewise. What was interesting was that although gold did perk up, it did not reflect a stampede to get out of all assets with the fear of inflation in mind.
The negative yield into German papers indicate that people are rushing to solid currencies. Before we venture further let's look at the 2011 asset class returns. Almost everything went into a hole except for bonds, corn and oil. Hence we cannot say there had been any over exuberance over the past 18 months.
|2011 Sector Performance||Performance||Potentially Similar ETF|
|2011 Capitalization Performance||Performance||Potentially Similar ETF|
|2011 Index Price Performance||Performance||Potentially Similar ETF|
|Hang Seng Index||-19.27%||(EWH)|
|Euro Stoxx 50||-18.41%||(FEU)|
|S&P/TSX Composite Index||-11.01%||(EWC)|
|2011 Currency Performance||Performance||Potentially Similar ETF|
|2011 Commodity Performance||Performance||Potentially Similar ETF|
|2011 Bond ETF Performance||Performance||ETF Used in Calculation|
|Long Term US Treasuries||30.25%||(TLT)|
|iShares Aggregate Bond Fund||4.68%||(AGG)|
The Contango Effect
Malaysian market players from the 90s would be well aware of the word contango. Say you buy shares with minimal deposit or no deposit for say RM100,000 and you have no bloody intention of picking them up, or have the ability to. You have to rollover, that's contango. In the futures markets for commodities, a substantial portion of trades are contango trades.
Final Word - I do not think this is developing into a catastrophic scenario. I believe the correction in commodities is more a congruence of factors aligning itself at the same time. Nothing much to do but sit and wait.